What Trump's Venezuela Sanctions Will Do To Oil Prices: Barclays Explains

As discussed over the weekend, the endgame in Venezuela is accelerating and it is now only a matter of time before the Maduro regime exits, stage left, the only question is whether he does so peacefully or with the sound of gunfire in the background. And, as we also noted last week, the collapse of the Maduro regime, will "one way or another, send oil prices up."

But while a regime change will certainly lead to violent swings in oil prices (mostly higher), even less volatile events could have a significant impact on the price of crude. According to an overnight report by Barclays' Warren Russell, "even limited new US-imposed sanctions or discussion of broader sanctions could be a catalyst for Venezuela defaulting on its upcoming debt payments, which would put upward pressure on oil prices and help tighten light-heavy spreads."

As it turns out, the timing of the note was apt because this morning, the Trump administration announced it was imposing sanctions on 13 senior officials of Venezuela's government, as well as military and state oil company PDVSA, "seeking to ratchet up pressure on President Nicolas Maduro to scrap plans for a controversial new congress." As Reuters reported, the United States decided to target individuals for alleged human rights abuses and corruption, while sparing the country for now from broader financial or “sectoral” sanctions against its vital oil industry "though such actions are still under consideration."

The move is aimed at showing Maduro's socialist government that U.S. President Donald Trump is prepared to make good on his threat of “strong and swift economic actions” if it goes ahead with plans for a vote on Sunday to establish an assembly that critics say will cement Maduro as dictator, the officials said.

So in that gray zone in which Maduro is still in control, but the US sanctions against Venezuela are escalating - as is the case now - what happens to the price of oil? The 15 second answer, according to Barclays, is that it depends on the duration of the disruption. If the sanctions do not lead to a long-term economic disruption, Barclays expects the US to consider Strategic Petroleum Reserve sales as a backstop. "Ample government and commercial stocks are likely to mitigate the severity and duration of any upside price move over a 2-3 month time frame. However, quality differences may become evident as US SPR stocks are mostly 30 API or higher."

However, "a sharper and longer disruption (eg, exceeding three months) could raise oil prices at least $5-7/b and flatten the curve structure despite an assumed return of some OPEC supply, a more robust US shale response, and weaker demand. It may be just the opportunity OPEC needs to exit its current strategy. US producer hedging activity would pick up if WTI moves to $50-55, limiting price upside potential."

Among the downstream consequences, is that refining margins should deteriorate if Venezuelan crude oil supply is curtailed. US refiners will be negatively affected by any sanctions related to trade constraints. On the other hand, China and India could benefit if Venezuelan oil is offered at a discount to comparable grades, Barclays suggests.

Finally, looking at Venezuela from a longer-term perspective, this is how Barclays estimates the local investment climate:

It is too early to assess the investment appetite in Venezuela in a post-Maduro environment. Though Venezuela’s assets are large, they are not short-cycle. Companies with deep connections to the country are likely to maintain a presence, but wait for the political landscape to stabilize before making incremental investments. Either way, it looks like Venezuela’s production trend is down over the near term.

For those who are eager for more reasons to buy oil, there are more details in the full Barclays excerpt below:

Looming risk of sanctions against Venezuela

The Trump administration is considering a wide variety of sanctions against the Venezuelan regime, which could range from sanctions on several senior government officials to targeting PDVSA’s ability to transact in US dollars, according to Reuters. This would not be the first time the Trump administration has taken action against Venezuela. The US already imposed sanctions on Venezuela’s vice president (February 2017), eight members of the Supreme Court (May 2017), and other military and government officials. The most recent Supreme Court sanctions were in response to the court’s decision to disband the democratically elected congress. The administration’s recent discussion of potential new sanctions would aim to keep elections “free and fair” and prevent President Maduro from being able to establish a dictatorship, which could occur as early as July 30.

The Trump administration is likely to proceed cautiously and incrementally with any sanctions. In contrast to the energy-related sanctions imposed on Russia and Iran, the more entrenched connections between US companies and consumers and the Venezuelan oil industry lead us to believe that the US administration will take a cautious approach.

Venezuela produces around 2.2 mb/d of oil and NGLs, which represents roughly 2% of the global petroleum market. Its Orinoco heavy oil plays a critical role as a feedstock for complex refineries around the world, particularly along the US Gulf Coast. Close to half of its 1.8 mb/d of oil exports go to OECD countries, with Asia consuming most of the remainder. Venezuela is the third largest exporter of oil to the US (?750 kb/d), behind Canada (3.2 mb/d) and Saudi Arabia (1.1 mb/d).

As a guide to potential outcomes, we examine US sanctions on Iran and Russia and their impact on the oil market. We find that the sanctions on Russia have not had a noticeable effect on its production or the oil market, while sanctions against Iran lowered its production and exports and supported oil prices. For more on sanctions on Russia and Iran, see the Appendix of this report.

We see several important differences between the situation in Venezuela and those in Iran and Russia.

  1. Unlike Russia and Iran, Venezuela is at significant risk of political and economic collapse. Low oil prices have greatly reduced the government’s ability to pay its outstanding debts while funding imports of basic goods. As a result, President Maduro has taken decisions that have resulted in a deteriorating quality of life for Venezuelans in recent years. Amid the current instability, even limited sanctions are likely to have an outsized effect on the oil market.
  2. A collapse in Venezuela could turn it into a regional crisis. More than 1.5mn Venezuelans have already fled the country because of the current crisis, this number could increase exponentially, affecting neighboring countries, particularly Colombia. The international community will need to support the region in a refugee crisis. In the case of Colombia, the situation could have additional implications because there are nearly 2mn Colombian and Colombian descendants living in Venezuela. Those people would likely be the first to cross the border and the Colombian government cannot deny them their rights as Colombian citizens. This could become significant fiscal burden for the Colombian government.
    Venezuela needs to import oil and refined products to produce oil. Roughly 50% of Venezuelan production is heavy oil, which is typically blended with diluent for transportation purposes. Without access to diluent imports from the US and elsewhere, certain Orinoco projects may be at risk of being shut-in. A trade embargo, sanctions that affect PDVSA, or a sovereign default could be catalysts for heavy oil shut-ins in the Orinoco. We estimated earlier this year that a default could take around 300 kb/d of heavy oil production offline (Commodities special report: The black swans of 2017, January 2017).
  3. The current state of Venezuela’s refinery sector necessitates fuel imports, which have been met in part by imports from the US. Plagued by underinvestment, Venezuela’s refineries have been running well below nameplate capacity, with Bloomberg recently reporting that the Puerto La Cruz refinery is running at 15% utilization. Restricting fuel shipments to Venezuela would result in increased dependency on the PDVSA’s dilapidated plants and imports from other origins to prevent the country coming to a standstill.
  4. Venezuela’s oil sector is much more intricately connected to the North American energy system, due to CITGO’s presence in the US and the dependence of other US refineries on Venezuelan feedstock. This interdependency with the US and the lesser connection with other OECD countries, mean Venezuela’s position in the international energy system is quite different to that of Russia or Iran.

If the US does impose further sanctions on Venezuela, it would likely take into account these differences. The use and timing of various sanctions will likely depend on how much the conflict escalates in the coming days and whether other factors (such as the potential for default on sovereign debt payments due in October and November), might be a catalyst for political change in the near future. In our view, if the Trump administration decides to issue sanctions, it would proceed conservatively and become increasingly restrictive only if its goals are not being achieved. One of the stated goals of the Trump administration is for Venezuela to hold “free and fair elections,” according to the White House press statement on July 17, 2017. Before implementing more aggressive sanctions, the administration is likely to seek multilateral support from other nations.

The EU recently expressed a willingness to impose sanctions on Venezuela as well. We believe sanctions could turn out to be a double-edged sword. Multilateral sanctions implemented after having exhausted negotiations are most likely to be successful. Nonetheless, history shows that sanctions alone are not enough to trigger political change, eg, Cuba, North Korea, and Syria. This finally depends on the level of internal pressure, which in Venezuela seems high.

Sanctions against individuals

Additional US-imposed sanctions against government officials may be the next step. Such sanctions are likely to cause some inconvenience but probably would have only a limited impact on Venezuela’s oil industry, in our view.

Sanctions on Venezuela’s energy sector

Sanctions could take several forms, ranging from sanctions similar to those imposed on Russia to more disruptive ones that could completely halt existing operations.

  • Sanctions that prohibit or limit investment in new exploration and production activity would not likely have an immediate direct impact on Venezuelan production. Many of the companies with equity stakes in Venezuela’s new greenfield developments are headquartered in non-OECD countries. Furthermore, due to the current upstream investment environment and the increasing political risk within Venezuela, we believe upstream spending on greenfield projects is limited, with many projects shelved for future reconsideration.
  • Sanctions prohibiting businesses from operating in Venezuela would be much more disruptive to Venezuela’s current contribution to the oil market. A policy that would limit US producer and service company operations and further investment in Venezuela, would require PDVSA and other international companies to step in to maintain operations. This scenario is likely to exacerbate Venezuela’s declining production profile.

Sanctions against PDVSA

The US could take an even more drastic approach by issuing direct sanctions against PDVSA. In an extreme scenario, if the NOC is banned from banking activity in the US and from trading with US entities, the impact would likely be swift and very damaging to Venezuelan oil production. Directly targeting PDVSA will also likely lead to a sovereign debt default in 2017. This action would affect Venezuela’s petroleum imports and exports.

  • PDVSA would have to find new destinations for nearly half of its oil exports, assuming production does not collapse. Currently, Venezuela ships more than 700 kb/d of oil to the US and nearly 100 kb/d to the EU. China and India would likely be alternative destinations for some of this crude.
  • PDVSA would also need to find a new source for some of its diluent needs. Algerian and Nigerian crude and condensates were previously used for diluent purposes and could substitute for shipments of US crude and products used in the transport of heavy oil. PDVSA could ask it JV partners to import diluent, but the capacity to do this would depend on the extent of sanctions and other countries’ participation. Even if possible, this could also increase the production cost of these fields to levels that are not financially viable, which could ultimately result in shut-ins.

We believe the US would implement such measures only as a last resort. In addition, the US would likely seek multilateral support from other nations before taking this route. Such an action is likely to be severely disruptive to Venezuela as well as the oil market and its participants.

Sanctions against PDVSA would likely also mean that US producers and service companies conducting business in Venezuela would have to cease operations, which would have an outsized effect on oil production compared to the effect of the US-imposed sanctions on Russia. Compared with Russia, Venezuela is much more reliant on foreign oilfield service companies for oil extraction.

Discussions of broader sanctions likely limits Venezuela’s access to capital

Regardless of whether new sanctions are imposed, discussion of broader sanctions could limit the Venezuelan government’s ability to raise financing and to make debt payments coming due in October and November. Moreover, it could change the government’s willingness to pay. If the current government wants to remain in control and not negotiate, it may be unwilling to use the few assets left to service its debt. As mentioned above, default alone would have a significant impact on oil production and the domestic economy.

The US could sell oil from the SPR to steady the market

We believe the US would consider the sale of oil from the strategic petroleum reserve (SPR) in order to smooth any price volatility that may result from a disruption to supply from Venezuela. The previous US administration was willing to tap the SPR to steady markets after the Libyan supply disruption, and we believe the current administration would consider this option as well. The US did not sell oil from the SPR during the 2002-03 Venezuelan supply disruption and prices rose by more than 40% during that period, although other factors also contributed. We doubt a disruption will result in a 40% price increase in the event of a supply disruption, but we think prices will rise nonetheless. For this reason, we think the US government would consider using the SPR as a backstop.

At present, we believe the price response to a disruption would be more muted than previous disruptions due to the apparent increased willingness of the US to use its SPR, the fact that OPEC could raise quotas, and US producers would begin to respond to sustained higher prices.


hedgeless_horseman Bill of Rights Wed, 07/26/2017 - 12:11 Permalink

 MOAR foreign entanglements!MOAR distractions from failed domestic governance!I am glad the USA isn't tampering with Venezualia's elections. http://www.zerohedge.com/news/2017-07-25/quick-and-simple-plan-politici…7) Pass a law that only people eligible to vote for a candidate may contribute to that candidate So, it is bad for Russia to influence our elections, but ok for Mexico, Israel, and Saudi Arabia?  Stop the hypocrisy.

In reply to by Bill of Rights

mayhem_korner Wed, 07/26/2017 - 12:11 Permalink

Tap the SPR to steady the markets?  Since when does shortening the duration of inventory reduce price volatility in commodity markets?Just look at price volatility in the RT electric market (where there is zero inventory).

besnook Wed, 07/26/2017 - 12:13 Permalink

omg!!! venezuela is an existential threat to the usa we must bomb them back to the pre bolivar age. they can destroy the usa in a coupla minutes!!!!!!

wtf is the usa fucking around with venezuela for? oh, yeah, i forgot. forgive me. i forgot oil confiscation is the real goal. i wonder what china and russia will have to say about it....and the poor guys who own all the citgo gas stations. they better not take the citgo sign down above the green monster. that will mean war with the red sox nation.

Give Me Some Truth besnook Wed, 07/26/2017 - 12:21 Permalink

Everyone says that "oil confiscation" is the "real goal" with American policy in the Mideast and now Venezuela.But can someone show me one example where America actually confiscated oil and used it for its own purposes?I mean couldn't we have stolen all of Iraq's oil and then "given" it to our own citizens so we could gas up our vehicles for, say, $1 a fill-up? I missed out on this give-away of all that "confiscated" oil.

In reply to by besnook

TuPhat Wed, 07/26/2017 - 12:17 Permalink

Previous ZH articles stated that the Venezuelan oil company was near collapse and selling very little oil anyway.  Someone is not telling the truth here.  Should expect it I guess.  US sanctions would only mean that other countries would buy more of the Venezuelan oil and we would buy more from the Saudis.  Very little difference but Barclays is probably talking their book to make money.

coast1 TuPhat Wed, 07/26/2017 - 13:16 Permalink

I posted this before...acording to NPR, here is where u.s. gets oil.40% comes from U.S.mexico 7.5%Venevuela 6%canada 15%persion gulf 13% (saudi arabia is 8% of that 13%) my quesion is, could not venezuela sell 3% to russia and 3% to china and break even?or, if russia and china wont buy, and the u.s. does not need it, then maybe we are in an oil glut?  you know, that supply and demand thing that we used to have decades ago?

In reply to by TuPhat

Give Me Some Truth Wed, 07/26/2017 - 12:18 Permalink

On the international front, American government has been reduced to:1. Starting wars 2. Absent wars, decisive "interventions."3. Nation-building/Occupation/Regime-Change4. Imposing SanctionsNever considered:"Minding our own business.""Treating others as we ourselves would like to be treated."And the "small-government" Republicans and "conservatives" love all of the above (none of which are possible without massive and continuous government actions and involvement). 

Pasadena Phil Wed, 07/26/2017 - 12:48 Permalink

Being a long-time oil stocks investor, I've learned not to take ZH seriously on this subject. ZH is like virtually everyone else. In a world of nothing but BS information, just decide on your political objective, embrace that narrative and then selectively report the BS data that suits the narrative. We ARE becoming energy independent and will soon become energy dominant. It doesn't require that we satisfy all of our domestic demand with domestic oil. All it requires is that we take control of price, castrate Big Oil/OPEC and keep upping domestic production. We could export ALL of our oil production and still be energy independent on natgas and everything else if it came to that.Sorry ZH but it's good being us.

Thomas W. Swift Wed, 07/26/2017 - 13:00 Permalink

Tom Swift’s Radiant Energy Lessons

Lesson #1: Definitions

ENTROPY: a thermodynamic quantity indicating disorder of a system.
FOSSIL FUEL: an outdated energy source, widely used from the 19th century until the early 21st century, when RADIANT ENERGY became widely known.
RADIANT ENERGY: a different form of electricity, discovered by Nikola Tesla in the 1890’s. See PHASE CONJUGATION.
OVERUNITY: a COP exceeding unity (1). In accordance with conservation of energy (see FIRST LAW OF THERMODYNAMICS), only possible if an outside energy source supplies some of the output energy. Examples of overunity include conventional renewables such as solar panels and wind turbines.
COEFFICIENT OF PERFORMANCE (COP): an engineering measure of an energy device, the ratio of its output energy to its input energy.
FIRST LAW OF THERMODYNAMICS: the law of conservation of energy (extended to the law of conservation of mass-energy by Einstein). Energy cannot be created or destroyed, it can only change forms.
SECOND LAW OF THERMODYNAMICS: whenever energy changes forms, some of it is always lost to unrecoverable forms because disorder (entropy) must increase for the universe as a whole. Only applies to closed systems, can be violated in open systems.
TIME REVERSAL: in physics, most of the fundamental physical laws do not have a preferred direction of time. Events can unfold equivalently whether time moves forward or backwards to our normal macroscopic sense. See “CPT symmetry” for a stronger symmetry principle.
PHASE CONJUGATION: in physics, particles can be reflected in a normal sense or in a “phase conjugate” sense, where the outgoing particles have their wave functions conjugated with respect to the incoming particles. In many respects this is equivalent to a time reversal and the outgoing particles act in some ways as if they are moving backwards in time. When put through a transformer, phase conjugate electricity produces OVERUNITY.

exartizo Wed, 07/26/2017 - 13:32 Permalink

it does appear that the good people of Venezuela have been dilapidated, flaccidated, truncated, perturbated, emaciated, and otherwise hyperventilated by the good Mr. Maduro regime.